Risk Word Files

Risk assessment is a step in the risk management process. Risk assessment is measuring two quantities of the risk R, the magnitude of the potential loss L, and the probability p that the loss will occur.

Ri = Lip(Li)

Rtotal =

∑

Lip(Li)

i

Risk assessment may be the most important step in the risk management process, and may also be the most difficult and prone to error. Once risks have been identified and assessed, the steps to properly deal with them are much more programmatical.

Part of the difficulty of risk management is that measurement of both of the quantities in which risk assessment is concerned can be very difficult itself. Uncertainty in the measurement is often large in both cases. Also, risk management would be simpler if a single metric could embody all of the information in the measurement. However, since two quantities are being measured, this is not possible. A risk with a large potential loss and a low probability of occurring must be treated differently than one with a low potential loss but a high likelihood of occurring. In theory both are of nearly equal priority in dealing with first, but in practice it can be very difficult to manage when faced with the scarcity of resources, especially time, in which to conduct the risk management process.